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Monday, December 29, 2008

Pension reforms in India off the blocks

The pension regulator today set the stage for opening the business for non-government employees from April by seeking proposals for setting up six pension funds.

Among the host of conditions specified in the Primary Information Memorandum and Expression of Interest (EOI) package, the Pension Fund Regulatory & Development Authority (PFRDA) intends to allow up to 26 per cent foreign investment but with the rider that the direct or indirect holding should not exceed 26 per cent.

The stipulation is akin to the foreign investment regime in the insurance sector, in which the regulator had also initially decided to factor in the indirect holding in the firm. Over the years, however, the norms were relaxed and the indirect holding is not counted in the 26 per cent ceiling for the sector.

The move from PFRDA is the latest in a series of financial sector reforms that the United Progressive Alliance government has managed to push through after the Left parties withdrew the support they extended in Parliament in June following disagreements over the Indo-US civil nuclear agreement.

Earlier this week, the government introduced a Bill to amend the insurance laws, which among other things, proposes to raise the foreign investment ceiling to 49 per cent.

If Parliament approves the insurance Bill, the foreign investment ceiling for the pension sector will also go up. A Bill to provide statutory backing to PFRDA is pending in Parliament but could not be approved owing to opposition from the Left parties. For the time being, however, PFRDA has proposed that the pension fund managers will sign an investment management agreement (IMA) with the board of the New Pension Scheme (NPS Trust).

The fund managers will be required to invest in line with the norms prescribed with a default option that is to be decided. The default option will come into play if an investor is unable to decide whether to invest in a balanced, growth or debt scheme. The investor will have the option of changing schemes periodically.

* A new company has to be floated, which will get a ‘certificate of commencement of business’ from PFRDA
* At least 5 years experience of fund management
* Monthly average assets under management not less than Rs 8,000 crore for the last 12 months
* Direct and indirect foreign investment not more than 26%
* Net worth of Rs 10 crore
* Sponsor will not hold more than 10% of equity in any other pension fund
* Sponsor will not hold more than 10% of equity in central record keeping agency under NPS
* Sponsor will not hold more than 5% of equity stake in NPS Custodian
* 50% independent directors

Central or state public sector companies or entities regulated by the Reserve Bank of India, Securities & Exchange Board of India or Insurance Regulatory and Development Authority are eligible to bid to be sponsors of a pension fund.

While 14 mutual fund houses had average assets under management of over Rs 8,000 at the end of November 2008, most insurance companies meet the eligibility norms by virtue of having a foreign joint venture partner. Most banks are also eligible to bid.

In addition, the three fund managers – State Bank of India, UTI and Life Insurance Corporation – that already manage the pension contribution of central and state government employees who joined from January 2004, will also be eligible to manage non-government business but will have to segregate the operations.

The last date for submitting the expression of interest is January 9, sources said, and PFRDA intends to appoint the fund managers by the first week of February. In addition, it is expected to start the process of appointment of point of presence, where subscribers can deposit their funds, over the next week to 10 days. To ensure that cross-holding does not lead to conflict of interest, PFRDA has decided to restrict a sponsor’s holding in another fund and National Securities Depository Ltd (NSDL) the central record-keeping agency. In addition, the pension fund cannot hold over 5 per cent stake in the NPS custodian, Stock Holding Corporation.


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